Anyone living in San Francisco or Seattle, where Teslas are a common sight, could be forgiven for believing that the electric-vehicle era is just around the corner.
Head out to the rest of the country, though, and the reality is more sobering — fully electric cars remain few and far between.
Despite their relative popularity among affluent city-dwellers, battery electric vehicles (BEVs) still make up only 2%-3% of U.S. vehicle sales. If you believe the industry and media hype, that share will soar over the next couple of years as big carmakers start phasing in BEV models in an effort to catch up with Tesla
and meet a vast untapped demand.
Any automaker or supplier who doesn’t immediately jump on this trend is viewed as hopelessly behind the times, according to this view. And any institutional or individual investor who isn’t adding electric-vehicle-related stocks to their portfolio is considered late to the party.
But are they right to rush headlong into these investments?
The reality is that the path to electrification is thorny and the pace will likely be slower than many expect. Investors and automotive industry players alike may not see returns as quickly as the BEV hype machine would suggest.
Fear of missing out
Heavy investor interest in the electric vehicle revolution — from day traders rushing into electric vehicle ecosystem stocks on Robinhood to institutional investors and private investors backing upstart BEV makers — is putting immense pressure on auto makers and suppliers to go electric for fear of missing out or not being labelled sufficiently environmentally friendly.
Yet, there are big question marks about the pace at which BEVs will populate the roads, even as automakers announce a slew of new electric models and invest heavily in new production facilities. General Motors, for one, has promised to phase out production of gas-powered cars by 2035. Volvo said it will only produce electric cars by 2030.
Even so, it’s doubtful that every carmaker in existence will pivot entirely to EVs. Also, the pandemic showed us that best-laid business plans can be delayed for extenuating circumstances.
For one, consumers are still on the fence about buying electric vehicles. BEVs are more expensive to buy than comparable gas-powered vehicles and will continue to be for the next four-plus years, unless governments provide significant subsidies. Even as carmakers launch new models, there’s a strong chance the higher prices will keep buyers on the sidelines or send them to automakers that still make internal combustion engine vehicles.
The other big obstacle to widespread adoption is “range anxiety” — particularly in rural areas — created by batteries and the current dearth a nationwide network of fast charging stations that will be key to resolving it.
The Biden administration’s infrastructure bill has $7.5 billion earmarked for charging stations, but there are no guarantees that’ll automatically, or quickly, result in a sufficient number of charging stations being available where they’re needed. Political priorities shift with every new administration and funding takes time to wend its way through the system.
Bumpy road ahead
This isn’t to say that the transition to electric won’t happen as pressure mounts to reduce carbon emissions. It will, and that’s a good thing.
But the pace of that change will be far more gradual and less smooth than many news headlines suggest, meaning that the internal combustion engine will continue to dominate U.S. roads for decades to come. This has widespread implications.
Less than 2% of the 285 million light vehicles on U.S. roads today are battery electric cars and many years will pass before they surpass the number of internal combustion engine vehicles in operation, even though sales are rising each year. By 2040, only about 25%-35% of vehicles on the road are expected to be fully electric.
For the thousands of companies that supply the auto industry or rely on it in some way, this means that careful strategic thought should be given to an electric transformation. Demand for after-market electric vehicle parts and services won’t reach the scale of their gas-powered brethren over the next few decades, even as automakers launch new BEVs.
Are battery-operated vehicles the future? Yes, it’s likely, unless a better low-emission technology is developed. But that future is farther off than recent hype and headlines would have many believe. Investors, as well as automakers, automotive suppliers and automotive ecosystem players should take note.
An electric future is coming but let’s be thoughtful about the pace of this significant change and consider the ramifications of unrealistic, premature expectations as well as the opportunities presented during this evolution.
Francois Mallette is managing director and partner at L.E.K. Consulting.